Minimum-wage increases will lead to lost jobs

Sixteen states – including California – are considering legislation this year to raise their minimum wage.

Most economists agree that raising the minimum wage will in most cases reduce employment opportunities for less-skilled workers. But minimum-wage advocates in California have argued the opposite, pointing at two studies by a team of economists affiliated with UC Berkeley which boldly assert that there are “no detectable employment losses from the kind of minimum wage increases we have seen in the United States.”

It’s a provocative claim, if true. In a new report, however, Ian Salas (UC Irvine), William Wascher (Federal Reserve Board) and I subject these revisionist studies (and the assumptions they rely on) to rigorous empirical testing. Our results suggest that California policymakers shouldn’t be so quick to set aside a tested economic consensus.

Whether for political reasons, or because a novel result is inherently more interesting than a confirmation of what we already know, there has historically been intense media interest in isolated studies claiming that minimum wages do not reduce employment. In some cases, these contradictory studies reflect the fact that minimum-wage increases may not always have an effect we can reliably measure. Often, however, these contradictory results are simply wrong.

Take, for instance, an earlier high-profile study of fast-food restaurants in New Jersey and Pennsylvania which claimed not only that higher minimum wages can increase employment. My earlier research with William Wascher showed that this conclusion was the result of flaws in how the data were collected.

Although the recent revisionist studies avoid this problem by using government data, the methods they use to analyze the data are flawed, and these flawed methods are responsible for their incorrect conclusions.

The key challenge in estimating the effect of the minimum wage on employment is coming up with a “counterfactual” for what would have happened in the absence of the minimum-wage increase. Economists have frequently used state variation in minimum wages to solve this problem, because states that do not raise their minimum wage can serve as “controls” for states that do.

The revisionist studies argue that this approach leads to mistaken evidence that minimum-wage increases reduce employment of low-skilled workers. Specifically, they argue that the dozens of state minimum-wage increases that occurred in the United States in recent years just happen to have occurred in regions where the employment of low-skilled workers was declining for other reasons. To measure the true effect of wage hikes, they argue that one has to compare what happened in states where minimum wages increased only to states in the same Census division or to counties on the other side of the state border.

On its face, this is not a crazy idea. Nearby states or counties could provide better controls for the states where minimum wages increased, because they might be exposed to similar economic shocks. However, most economists are trained not to simply rely on their hunches, but to test them. When we do that, we reach three main conclusions.

First, it is typically not nearby states or counties that provide the best control groups – undermining the key assumption imposed by the revisionist studies. Second, when the analysis is not restricted to nearby states or cross-border counties, the evidence on minimum wages is consistent with earlier studies. Third, and perhaps most significantly, in the isolated cases of states where nearby states and counties are a good control group, the estimated minimum-wage effects on employment are again negative.

In other words, once we test the methods used in the revisionist studies, we either reject the methods or we find that – where they do hold – there’s still evidence confirming that minimum-wage increases reduce employment of low-skilled workers. This is not blind adherence to a competitive model of the labor market, but rather a carefully measured empirical fact.

Adherents of the view that higher minimum wages do not destroy jobs have to ignore an overwhelming amount of evidence that points in the other direction. But to overturn a well-established economic conclusion, one has to make a strong case that the proposed data and methods are more believable and credible than what’s come before. Recent studies claiming that higher minimum wages don’t destroy jobs fall well short of these standards.

Neumark is Chancellor’s Professor of Economics and Director of the Center for Economics & Public Policy at the University of California Irvine. The Employment Policies Institute provided research support to Neumark and Salas.